Can Wonga become Facebook for finance? Interview with Errol Damelin

It is the British business sensation that last year grew faster than any other UK tech company, to £74m turnover. How does founder Errol Damelin do it?

Wonga is controversial. If it’s not the short-term loan provider’s 4,214% APR being denounced by the tabloids, it’s the recent wrist-slapping from the OFT for accusing customers of fraud in 2010 (after customers defaulted on repayments – Wonga is appealing).

But everyone in the business world also knows that Wonga is a sensational British success story. Turnover was £74m in 2010 – a fourfold revenue increase on 2009 – with profit of £16.6m. Last year Wonga topped the Tech Track 100, the Sunday Times index of the UK’s fastest-growing technology companies. A couple of weeks ago Wonga made its first international foray, launching in South Africa. Over the weekend there were rumours of a float, though the company is denying it.

Founder Errol Damelin, who I’m meeting today, has won pretty much every major Entrepreneur of the Year award going. When Wonga.com went live in 2008 (two years after the company was founded), it was the only fully-automated risk, ID and decision system in the world (it can make lending decisions in as little as 15 minutes). It has since made more than four million loans, totalling more than £1bn. Wonga claims its net promoter score (i.e. the number of customers who say they would recommend the service to someone else) is 73 per cent. A 40 per cent net promoter score is considered very good. 73 per cent is on a par with Apple and Google.

“I think the crux of why some of banking is broken is that the way it makes decisions is not scalable”

Wonga’s second product, Wonga for Business, launched four weeks ago to the kind of bipolar media furore the company has grown accustomed to. Some business journalists heralded it as a hugely welcome option for small businesses battling the kind of sudden, unforeseeable cashflow emergencies that anyone who has run a start-up will be familiar with. (Wonga for Business can deposit up to £10,000 into your business bank account within 24 hours, and up to £25,000 for return customers.) Other newspapers heeded caution about a service that can charge up to two per cent interest per week on a business loan.

Frankly, I’m not interested in all this media toing and froing. All I want to know is how Wonga has managed to create such astonishing growth over the last three years.

Damelin is a man with a vision, on a mission. He is polite, dressed in a crisp white shirt open at the neck and black trousers, and slim with closely cropped hair. He is physically unassuming. Yet he speaks in that very crystallised and fluid way that you only really come across in intelligent people who know their own mind and are free from flickers of self-doubt.

He’s hugely ambitious, and unabashedly so. He tells me, as he has told many other journalists, that he intends to build a business as big and influential as Google, Facebook, Amazon, PayPal.

If growth continues the way it has so far – and Wonga is expecting turnover to hit the hundreds of millions in 2012, its fourth year since trading began – that goal might just be achievable.

So how does Damelin do it?

Scaling and controlling Wonga’s growth

“We haven’t been growing as fast as we possibly could,” Damelin tells me. “We’ve been growing in very controlled way. So if you look at our monthly numbers it’s pretty much a straight line for the last five years.”

Wonga uses marketing to ramp up customer numbers when needed. You’ll have spotted the recent bus adverts for Wonga for Business, and the TV ad with the drum-and-bass-loving grandpa puppet for Wonga. (Wonga has also sponsored Blackpool FC and free travel on the tube over New Year’s Eve.) “We’ve learnt enough about the market that we understand what the intrinsic cycles look like, so we plan into the year and month – we market around those.” The company can also limit the number of loan applications it accepts to put the brakes on growth when needed. On average, two thirds of loan applicants are turned down.

Wonga has gone from “four of us working around a table” where “everyone can finish each other’s sentences” in 2006, to around 300 employees spread across five different countries today.

Of those 300, Damelin tells me, “I think only three have a background in banking […] because I believe if you’re disrupting you want to disrupt from outside. You don’t want to assume all the problems that you’ve had somewhere else and then come and impose those things onto us.”

Of Wonga’s 300 employees, “only three have a background in banking”

Recruitments are made wherever possible on “core characteristics like problem solving, intelligence, people’s view of who they are and what they want to do – we look for problem solvers who are ambitious and interested in making an impact on society and making a difference in the world”. Experience is “pretty low on our radar” in any given role (excepting those that necessitate it, such as legal positions). “Most senior people at Wonga are playing roles that they’ve never played before.”

The thinking behind this demonstrates Damelin’s resistance to the company stagnating at any level. “Hiring people that you can then put into other roles is a core part of scaling” because “people don’t wait five months to solve a problem. So if someone recruits for a problem they’ve got today, then they’re going to have figured it out […] then very possibly the reason you hired them has gone away.”

Scaling up a company at the pace Wonga is going is no small feat. It has been powered by more than £100m of venture capital from Balderton Capital, Accel Partners, Oak Investment Partners and Greylock Partners, among others. The most recent round was in February 2011, totting up to £73m.

“One has to be really clear I think about one wants on a very personal level - so do you want to control a business or do you want to build something that affects as many people’s lives as possible?

“If it’s the latter, you need to grow fast, you need to invest ahead of demand, and you most likely need to get outside capital in from business angels or VCs. As soon as you do that you’re a different kind of entity on a different path. You’re committed to a different degree of risk.” Damelin thinks that if a company funds itself, “you’ll probably find it much harder to have as big an impact [on people’s lives], as you’re always constrained, not just by capital but by access to talent capital.”

How Wonga is always exploring innovation

Wonga’s “talent capital” is crucial to innovation. The majority of employees are working on new ideas at any given time. “Apart from the customer service team, it’s probably between two-thirds and three-quarters, if you combine people working on new products and new markets.”

Damelin has developed a fascinating structure to ensure that his team is constantly exploring new opportunities - though he is smilingly reluctant to tell me about it. After a long pause and a “I don’t know if I should tell you”, he does. “So we have a group of people working on the core business. Then we’ve got a separate organisation with its own resource - so separate capability completely - working on new markets, and another one working on new products. They’ve got their own tech resource, they’ve got their own resource pool completely.”

Damelin, a former investment banker who founded a successful steel wire making company in Israel before building and selling Supply Chain Connect in London, contrived the idea of a separate business-within-the-business after gaining a valuable insight from his own experiences and through watching other companies grow: “As you’re scaling you become a victim of your own success. […] If your first product is relatively successful, it becomes really difficult to continue to allocate resource to innovative new products. Because on any particular day we’d get a bigger bang for our buck by doing more optimisation of our core product. But strategically, we want to be doing other things.”

The separate organisation created to “resolve” this dilemma is “incentivised and focused around objectives that have got nothing to do with the core business – and it’s working well so far.”

Errol Damelin: on a mission to disrupt the financial services industry

Damelin’s goal for Wonga has always been to disrupt the financial services industry. He travelled for a year before launching the company to settle on the right idea.

Wonga hinges on the belief that machines can make better lending decisions than people. Wonga crunches several thousand data points for each lending decision it makes. How exactly it sources all that data is, of course, Damelin’s big secret, but it’s been suggested that it could use electoral roll information, online house value estimates, Companies House data and even Google searches on a person’s name with words like “fired” or “redundant”. Wonga also monitors your activity as you move around the site, so whacking those sliders up to the highest loan possible straight away will have an impact on how your creditworthiness is assessed.

Damelin believes that loan decisions made by bank managers will always be inherently prejudiced - “that’s just the human condition”. No doubt growing up in apartheid South Africa, where he partook in student protests against discrimination while a student at Cape Town University, helped form his views.

He is suspicious of the local bank manager’s ability to make an unbiased decision, when that manager has known the local community all their lives – and criticises the “very nostalgic view” in the wake of the credit crunch that financial services is worse for orientating away from that model.

“I think the crux of why some of banking is broken is that the way it makes decisions is not scalable. It’s one thing to hire one very smart person, but how do you get the 1,000 people in each of the 1,000 branches to do the same thing? […] How do you control risk with humans doing it?”

Damelin does think there is a future for banks, but that the industry will undergo the same kind of dramatic metamorphosis as the media industry. “As a society I think it’s really important that there are alternatives [to banks]. And Wonga’s one alternative.”

He think the range of products now available – such as crowd-funding and peer-to-peer lending – are “from a policy perspective, super-exciting and super-interesting. If we want banks not to be too big to fail we have to give individuals and businesses different options to get what they want. […] It’s not that [customers] don’t want anything to do with banks, it’s just that they want more competition, more choice.”

At the press launch for Wonga for Business, Damelin underlined this idea of market choice. He said Wonga for Business should not be seen as the be-all and end-all solution for business finance. Instead, it should be used according to the circumstance a company is facing. “We’re not trying to dominate any particular space, we’re just adding a solution to the ecosphere,” he said at the launch. “This isn’t a market where any one provider should be the only solution.”

Wonga for Business: How it works

Loans are up to £10,000 for first-time users, and up to £25,000 for returning customers. They can be taken up to 52 weeks.

Wonga for Business crunches 8,000 bits of data on the directors of the business as well as the company itself when an application is made. Interest rate is calculated on a case by case basis according to the applicant’s risk profile.

Companies must have more than £20,000 monthly revenue and have been trading for at least three years. Only limited companies and LLP’s can apply.

But don’t imagine for a minute that Wonga for Business will be the end of Wonga’s product range. Damelin wouldn’t dream of stopping here. He tells me that his ambitions for Wonga have always been “massive”. “We were clear in the beginning that we wanted to build something very significant. We wanted to really participate in how an industry, a massive industry, one of the biggest in the world, was going to be re-shaped.”

Damelin is focused on creating a business that “impacts as many people’s lives as possible”. He wants to recreate the model of the likes of Google, Facebook and Amazon, which have “built platforms that they use to disrupt big sectors themselves. Amazon […] allow other people to use a service that is much more valuable than just the technology, wrapping it up with the service, the pricing, the technology, the product.”

The tech Goliaths that inspire Damelin are hugely multi-purpose – they’re like supermarkets full of functionality. Think of how Facebook lets you network, share photos, play games, market your business, advertise, organise events, buy and sell products, set up community groups, and so on. If you can imagine a platform with that range of products and functionality operating in the realm of money – a Facebook of finance - you might get some way to prophesising what Wonga could look like in years to come, if all goes to plan.

Damelin notes how disruptive companies blur the boundaries of industries, becoming so far-reaching as to defy being labelled simply a ‘retailer’ or ‘tech company’.

He thinks this is “real innovation” and disruption - “when you really are changing what was perceived to be the structure of an industry; you’re not just competing within it. So, for example, is Google an advertising agency or a technology company? […]

“In time it won’t be that clear what Wonga is either. We’ll help customers in a lot of different ways, and it probably won’t look structurally the same as a bank looks.”

Building the next Facebook is a huge ambition. How does one man have all that conviction in himself? Damelin takes a long pause and smiles, his eyes scrunching right up. “I think some people are more confident than others. And it’s not a good thing or a bad thing - really it’s just knowing what you want to do. I’ve never found that a challenge though, that feeling of conviction about stuff.”